Sunday, April 27, 2008

optimism is dangerous - stack the odds in your favor.

Generic Start Up Revenue Chart
see another graph that's quite possibly the most creative thing ever done with Windows 98 and XP sounds.

Wednesday, April 16, 2008

Making a difference

The News-Record's Sonja Elmquist wrote a wonderful article about 600 orphan children living in one of the world's poorest nations, and how two men stepped up to the plate ten years ago to make a difference.

Brothers in law Jack Reynolds and Father Marc share a vision: make a sustainable difference in the lives of Haiti's orphans. All this excitement takes place at Theo's Work. Jack raises the money and encourages Father Mark in his role. Jack is really good at inviting anyone who will take him seriously to go with him to Haiti to see and to do, first-hand, meaningful life-changing work. Father Marc runs the orphanage and school and encourages Jack in his role. Father Marc does a terrific job involving and thanking donors, something not easily accomplished in the world of non-profits.

So far, Jack's involved at least three guys I know in this important work: Max Kern, Chuck Downey, and Drew Jones. Max, Chuck, Jack and I (and about 55 other fired-up men and women) are Gate City Rotarians. I don't know if Drew is a Rotarian or not, but he doesn't stand a chance. Next time he jogs through Sunset Hills, Jack and I plan to tackle him and bring him to a Thursday morning meeting, which if you haven't attended, you should.

Whoever said Rotary is just a club for old men and their fathers hasn't visited Gate City yet. I've been places where I've read the vision statement but at Gate City, I feel the vision statement.

Wednesday, April 09, 2008

All you need to know about halos and investment performance

Read "Affect in a Behavioral Asset-Pricing Model" in the Financial Analysts Journal by Meir Statman, Kenneth L. Fisher, and Anginer. I don't know Fisher or Anginer, but I know Statman knows his stuff. You'll need a login/pw to read the full text on CFA Publications or read selected portions from the abstract/summary below:

"We outline a behavioral asset-pricing model in which expected returns are high when objective risk is high and also when subjective risk is high. Investors prefer stocks with positive affect, and their preference boosts the prices of such stocks and depresses their subsequent returns. The preferences of investors were gathered from surveys conducted by Fortune magazine in 1983--2006 and in additional surveys we conducted in 2007. From the Fortune data, the authors found that the returns of admired stocks, those highly rated by the Fortune respondents, were lower than the returns of spurned stocks, those rated low. This finding is consistent with the hypothesis that stocks with negative affect have high subjective risk and their extra returns compensate for that risk. In these surveys, we presented investors with only the names of companies and their industries and asked them to rate the affect of these companies. The questionnaire said, "Look at the name of the company and its industry and quickly rate the feeling associated with it on a scale ranging from bad to good. We found a positive correlation between these affect scores and the companies' Fortune scores. Moreover, we found that positive affect creates a halo over stocks that results in perceptions that they promise high future returns coupled with low risk." FAJ, March/April 2008, Vol. 64, No. 2: 20-29

Tuesday, April 08, 2008

Tails that wag dogs and other behavioral traps

Friends Jim Ware, CFA and Jamie Zeigler, CFA, co-authors of High Performing Investment Teams: How to Achieve Best Practices of Top Firms, and founders of Focus Consulting Group of Long Grove, IL, say this about their work with investment firms:

"concentrating on understanding and improving behavioral forces at work within the firm and trying to help its financial leaders understand and leverage the firm's culture to achieve a competitive advantage is essential. Avoiding many of the behavioral finance mistakes requires a culture that is self-aware. Managers have to get better at asking themselves, 'What am I doing right now, and why and am I doing it? If I'm selling a stock, what's my real motivation? Are my actions based on a gut feeling or thorough research?'

Michael Ervolini, Founder and CEO of Boston Based Cabot Research, says,

"as an industry, we've talked about behavioral finance for a decade, but until not, portfolio managers have not had a way to apply it. Now's the time to move behavioral finance from cocktail talk to an integrated part of one's investment discipline."

I say take it one step further.

My firm is an SEC registered investment advisor. We've mailed investment performance reports to clients for twenty years.

That’s eighty quarterly reports for the twenty year client, sixty reports for the fifteen year client, and so on and so on.

Before we know it, we've given our otherwise “normal” clients lots and lots of opportunities to draw unintended conclusions from the tail that wags the dog. This, in turn, causes no small numbers of otherwise well-meaning, intelligent people to make unwise financial decisions, for instance, selling out, foregoing further contributions to 401(k) plans, and saving $0.50 by leaving the cream cheese off when ordering a bagel.

I see opportunity.

Besides illustrating your asset allocation or estimating dividends for the coming year, were you truly informed the last time you looked at your broker’s statement? If performance soared or you beat your brother in law, did you feel smart? If seeing the cover of Money Magazine depressed you because they picked the best performing funds, in advance, and you didn't, will this emotional self-whipping help you navigate successfully over the next 50 years or maintain your purchasing power?

I’m passionate about overcoming unproductive behavioral forces, and highly motivated to reengineer this dog-wagging tail of a thing known as investment performance reports.

I'd love to hear ideas, opinions, and feedback.

And heed Jane Bryant Quinn's advice: give financial porn a wide berth.

Saturday, April 05, 2008

View Dan Ariely: Predictably Irrational on (click Dan or the link below to launch)

View Dan Ariely: Predictably Irrational on
View Dan Ariely: Predictably Irrational on

Dan Ariely on Bear Stearns

Did the lines between taking risk and cheating blur? You be the judge.

Tuesday, April 01, 2008

Predictably Irrational

John Tierny published an article February 26, 2008 titled The Advantages of Closing a Few Doors. A devotee of Dan Ariely's informative discoveries about how humans make all sorts of decisions, most of which are hazardous to our financial, physical, and emotional health, Tierny lays out a careful explanation.

You don't need to be a Ph.D. to know humans have a love affair with our options, and there are no lengths we won't go to keep as many options open. It's when we see the doors closing on our options, as doors invariably do, we respond, not in rational ways, but in normal human, ways.

If you like keeping options open (I know I sure do) take the online test at Tierny Lab.

Further Reading: "Predictably Irrational: The Hidden Forces That Shape Our Decisions." Dan Ariely; HarperCollins, 2008.

"Keeping Doors Open: The Effect of Unavailability on Incentives to Keep Options Viable." Jiwoong Shin, Dan Ariely. Management Science, May 2004. (PDF)